About Today's Jobs Report...
The May unemployment report came rolling from the United States Department of Labor this morning.
In the highly technical vernacular of the trade… it was a “miss.”
And not by a nose, not by a hair, not by a whisker.
Economists as a group divined 175,000 May jobs.
What was the actual number?
Seventy-five thousand — fully 100,000 beneath consensus — and the lousiest figure since February.
Each one of 77 Wall Street analysts — each one — heaved up a greater estimate.
But unlike February, they cannot foist blame upon winter weather or a government shutdown.
Thus our faith in experts staggers yet again… and fast approaches our faith in weathermen, crystal gazers, salesmen of pre-owned automobiles and congressmen of the United States.
But our faith in the lunacy of the existing financial system is infinitely confirmed…
Wall Street vs. Main Street
In a healthful and functioning order, the stock market is a plausible approximation of prevailing economic conditions.
A poor unemployment report should send panicked shudders through the stock market.
It indicates a wobbled economy. Rough business is likely ahead. And companies can expect a reduced profit.
Stocks should — in consequence — fall tumbling on the news.
But ours is not a healthful and functioning order. It is rather an Alice in Wonderland order.
Up is down. Down is up. Good news is bad news.
And bad news is good news…
Bad news for Main Street is good news for Wall Street, that is.
Wall Street thrives on Main Street’s bad news as doctors thrive on fractured legs… as dentists thrive on toothaches… as embalmers thrive on murders.
And this morning’s jobs report constitutes good news for Wall Street.
It merely forms additional evidence the Federal Reserve will be slashing interest rates soon.
And low interest rates are the helium that lifted stocks to such gaudy and obscene heights lo these many years.
Stocks Soar on Today’s Weak Jobs Report
The Dow Jones was so heavily floored by this morning’s jobs report it went up 300 points by 11 a.m.
The other major indexes were similarly flabbergasted.
The S&P was up 35 points and the Nasdaq up 130 by the same 11 a.m.
All three indexes composed themselves somewhat by day’s end.
The Dow Jones ended the day 263 points in green territory. The S&P gained 30 points, while the Nasdaq added 126.
Yet as we documented Wednesday, the economy is going backward… and recessionary warnings flash in all directions.
Meantime, all reasonable estimates place second-quarter GDP growth under 2%.
But because the Federal Reserve promises yet additional levitating gases, the stock market has record heights once again in view.
“The Disconnect Between the Economy and Stocks is at Record Highs”
Thus the gentlemen of Zero Hedge declare, “The disconnect between the economy and stocks is at record highs.”
JJ Kinahan — chief market strategist at TD Ameritrade — here affirms the “bad news is good news” theory:
The market’s got a conundrum here. That’s a bad report. Just on the report itself, I think people would want to sell the market. However, the fact that it really makes the case for a rate cut, I think is why you’re seeing the market hang in there.
Affirms Mike Loewengart — vice president of investment strategy at E-Trade:
This is the type of [jobs report] the doves will really take to as it supports the argument for cutting rates beyond politics or trade issues…
Luke Tilley, chief economist at Wilmington Trust, adds:
I think that this is a true slowdown in hiring right now… The market signals are obviously screaming for the Fed to reduce rates.
Wall Street has Jerome Powell by the ear.
When Wall Street screams for lower interest rates, lower interest rates it will have.
Odds of Rate Cuts Approach 100%
The market presently gives 84% odds that the Federal Reserve will cut rates at least 25 basis points by July. By September those odds increase to 95%.
By January, they rise to 99%… with the heaviest betting on two rate cuts.
Investors further expect at least three rate cuts by next June.
But as we have detailed at length… you can expect recession within three months of the inevitable rate cut — whenever it may fall.
Yes, the next destination is recession.
The route may twist, the route may meander, the route may even temporarily turn back on itself.
But it terminates in recession nonetheless.
The “New Normal”
The No. 2 man at the Federal Reserve would nonetheless have us put away all talk of recession.
Mr. John Williams insists diminished growth is merely the “new normal”:
I know this talk of slowing growth is causing uncertainty, some hand-wringing and even fear of recession. But slower growth shouldn’t necessarily come as a surprise. Instead, it’s the “new normal” we should expect.
But with the highest respect to Mr. Williams… why shouldn’t we expect more?
The United States government borrowed in excess of $10 trillion over the prior decade.
$10 trillion is plenty handsome. Yet that $10 trillion of debt yielded only $3 trillion of real GDP.
Or to switch the figures some, the nation’s debt increases roughly $100 billion per month.
But GDP only increases some $40 billion per month.
We have gotten plenty of buck, that is. But not half so much bang to go with it.
The nation’s debt-to-GDP ratio already exceeds 100% — its highest since WWII.
The standard formula says deficits should decline during economic expansions. Come the inevitable recession, the government then has a full war chest to throw at it.
But a decade into the current expansion… the Treasury is depleted.
Trillion-dollar deficits extend to the horizon.
And the debt-to-GDP ratio is projected at 115% within three years.
Meantime, the Federal Reserve expects long-term GDP growth of 1.9%.
It is a bleak calculus — growing debt twinned with sagging growth.
The Mills of the Gods
As we have argued previously, time equalizes as nothing else.
Scales balance, that which goes up comes down, that which goes down comes up…
The mighty fall, mountains crumble, the meek inherit the Earth.
We suspect strongly that stock market and economy will meet again on fair ground.
We further suspect it is stock market that will fall to the level of economy. Not the other way.
The mills of the gods may grind slowly, as Greek philosopher Sextus Empiricus noted.
But as he warned…
They grind exceedingly fine…
Managing editor, The Daily Reckoning